Policy Instability and the Future of U.S. Wind Power

Having a stable and transparent policy framework is critical to boosting a country’s “investability” from a renewable energy perspective. But how do we measure such stability? Although investors commonly evaluate certain aspects of regulatory and policy risk—such as the likelihood that a government will alter existing regulations or policies that benefit a particular industry or sector—their assessments rarely consider such variables as policy efficiency, the impact of policy instability, and the gap between existing directives and actual implementation.

Policy instability is a particular threat to the U.S. wind energy market, which has experienced remarkable growth in recent decades. In 2011, the United States accounted for 17 percent of global wind power capacity additions, second only to China at 43 percent. According to figures from Navigant Consulting, China’s share of the global wind market actually declined in 2011, whereas the U.S. share increased substantially—thanks in large part to the wind Production Tax Credit (PTC).

The PTC is largely credited as the single most significant driver of U.S. wind industry development. Introduced as part of the Energy Policy Act of 1992, it reduces corporate income tax by 2.2 cents for every kilowatt-hour of wind energy produced, with the goal of making wind power more competitive with traditional sources of generation. The American Wind Energy Association (AWEA) credits the PTC as reducing the cost of wind generation by 90 percent over the past 20 years.

Yet the U.S. wind market has been plagued by a boom-and-bust pattern and is fraught with uncertainty. Wind power has shown impressive growth, representing a third of the total added U.S. power generation capacity in 2011, behind only natural gas. Even so, wind still provides only 3 percent of the nation’s electricity, making it far from a mainstream power source. And the future of U.S. wind power is now even more uncertain given the slated expiration of the PTC at the end of this year.

Expiration dates, also known as “sunsets,” are a common component of tax legislation. The wind PTC is renewed for periods of only 1–3 years at a time, which is often shorter than the typical 3–7 year development cycle of a wind farm. The PTC has been extended four times to date and has been allowed to sunset three times since it was implemented. Impending sunsets and last-minute extensions wreak havoc on the wind power market by interrupting both short-term projects and long-term industry planning. The continuous threat of expiration and uncertainty of extension threatens access to finance, shattering market confidence and impeding growth as a whole.

The fallout from the impending PTC sunset has already begun. Citing the soft market resulting from the uncertain future of the PTC, Vestas Wind Systems, the world’s largest wind turbine manufacturer, announced this week that it would be cutting 20 percent of the workforce at its Pueblo, Colorado, facility. In light of this, there has been a bipartisan push for a two-year extension of the wind PTC through the introduction of theAmerican Energy and Job Promotion Act. In March, the U.S. Senate rejected an effort to pass a one-year extension to the PTC. Many senators from wind-rich states such as Iowa, Colorado, Oregon, and Massachusetts claim that letting the PTC sunset will cost their states thousands of jobs.

According to a new report from the Department of Energy (DOE), U.S. wind power capacity reached 47,000 megawatts (MW) by the end of 2011 and has since grown to 50,000 MW, or enough to power 13 million homes annually. Six states now meet more than 10 percent of their total electricity needs with wind power, and the wind industry accounts for more than 75,000 American jobs. The United States generated 27 percent more electricity from wind in 2011 than in 2010, with financing for approximately 4,000 MW of new capacity attributed to the PTC.

According to the DOE report, the sharp drops in added wind capacity in the three years when the PTC lapsed—2000, 2002, and 2004—indicate the importance of the PTC to the U.S. wind industry. In these years, capacity declined by 93 percent, 73 percent, and 77 percent, respectively (see graph). The AWEA predicts that 37,000 jobs could be lost if the tax credit is not extended. This type of boom-bust cycle illustrates how regulatory and policy uncertainty create barriers to renewable energy investments both in the United States and around the world.

Indicators for renewable energy development

Currently, there is no concrete set of metrics to measure holistic progress in the development and deployment of renewable energy. And no framework exists for measuring how the development of renewables contributes to national priorities or development goals. By developing such a framework, Worldwatch’s indicators project hopes to serve as a valuable tool in both promoting renewable energy technologies as well as monitoring, tracking, and assessing individual country progress toward renewable energy targets. The aim of this ambitious project is to offer policymakers the insight and information they need to create effective and adaptive long-term energy policy, which is critical to the development of not just wind power, but all renewable energy technologies.

Although the introduction of a set of renewable energy indicators will bridge a large information gap and is an important step toward making better policy decisions, it cannot, by itself, create the political will needed to move renewable energy development forward in the increasingly politicized arena of national energy policy. However, greater transparency about the true cost of energy and what types of policies are most effective in promoting cost-efficient and sustainable energy options, coupled with more information on the social and environmental benefits that inevitably accompany cleaner energy, can undoubtedly serve as catalysts in developing the type of political will needed to initiate a systemic overhaul of our current energy system.